Defense Savings to Partly Fund Danish Tax Reform

Aug. 20, 2012 - 08:23AM
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Danish Minister of Defence Nick Haekkerup said the defense savings sought in the TRP would not affect military spending in the current five-year defense plan. Haekkerup is seen above last year in Brussels. (THIERRY CHARLIER / AFP / Getty)

HELSINKI — The leftist Danish People’s Party (DPP) has threatened to veto the government’s ambitious Tax Reform Program (TRP), which plans to use $450 million cut from military spending to finance income tax cuts and employment incentives.

The DPP said it had initially agreed to support a tax reform plan that sought a maximum of $300 million in defense savings but now claims the government intends to fund more of the tax program from defense. The TRP aims to reduce the annual income tax take by $2.4 billion.

Defense Minister Nick Haekkerup said the defense savings sought in the TRP would not affect military spending in the current five-year defense plan, which runs to 2014. Funding for the tax program also will come from efficiency savings in other key public service areas, the minister said.

However, the DPP claims the government plans to proceed with TRP-related expenditure cuts before 2014, said Kristian Thulesen Dahl, the DPP’s spokesman on defense.

“We cannot accept a further DKK [Danish kroner] 700 million [$116.6 million] in defense cuts in the lifetime of the current political defense spending framework,” Dahl said. “This is not what we originally agreed to.”

The differing views adopted by the ruling center-left government and the DPP reflect growing unease within political and military quarters over future defense reform plans of Prime Minister Helle Thorning-Schmidt’s Social Democratic-led administration, Dahl said.

The government originally planned to spare defense and find its necessary funding by cutting mortgage relief, said Helge Pedersen, a senior economist with Nordea Bank.

“The reduction of mortgage interest relief was to have contributed nearly $670 million to the financing plan,” Pedersen said. “Instead, this amount will mainly be found through $450 million in expenditure reductions on defense and a $170 million cut in Denmark’s contribution to the European Union.”

In a submission to the government Aug. 14, the DPP warned that any further cuts above those already agreed in the current 2010-14 defense plan could force a cash-strapped military to shut up to six of the country’s biggest regional garrisons.

“We will not stand idly by and watch the military dismantle key facilities because of a lack of proper funding,” Dahl said. “There is a risk that barracks in Sonderborg, Haderslev, Odense, Varde, Allinge and the naval yard in Korsor may pay the price of this tax reform.”

But the government claims the tax reform will not hurt military spending. John Dyrby Paulsen, the Social Democratic Party’s (SDP) finance spokesman, said the funding targets established in the 2010-14 defense spending budget framework will hold.

“The $450 million in expenditure savings will be applied during the lifetime of the next defense spending framework plan, which will run from 2015 to 2019,” Paulsen said. “The DPP has not fully understood how this tax reform agreement will work. The DPP is also a party to this agreement, but it seems to now want to exclude itself. It must be stressed that no defense savings will be sought, or taken, before 2015.”

A frustrated Haekkerup said confidentiality was a key component of cross-party cooperation on defense and that it was inappropriate for the DPP to publicize the content of such talks. He described as “speculative” the DPP’s contention that six garrisons might close.

“We have a standing agreement with all political parties involved in the defense bill — including the DPP — that we will not discuss certain matters in the public domain,” Haekkerup said in a statement. “We need this discussion to stay within the boundaries of the interparty talks to ensure that the savings plan is complete as possible.”

The government’s defense modernization and reform plans go beyond funding. In June, the MoD announced plans to dismantle the military’s existing Defense Command formation (Forsvarskommandoen) and integrate it into the MoD to create a fused civilian and military leadership structure.

The MoD estimates the Defense Command reform plan can save $500 million, with the added bonus of making the military’s financial management systems more transparent and cost-efficient. No firm date has yet been set for the reorganization.

“There will still be a defense commander who will be the leading military adviser to the defense minister. The military’s competencies will be the same, the only difference being they will be part of the ministry,” Haekkerup said.

Apart from the DPP, the Liberals and Conservatives have also criticized the government’s defense spending policies and foreign operations strategies, which they complain have sucked significant monies out of annual defense budgets and away from core units.

Despite this, the Liberals and Conservatives support the TRP and big-ticket international expenditures, such as the large-scale costs attached to the deployment of Danish forces and air assets to Afghanistan and Libya.

The Danish Audit Office estimates Denmark has spent more than $2.5 billion on its ground and air forces in Afghanistan since 2001. A further $150 million was spent on the Danish F-16 fighter squadron sent to support NATO’s Operation Unified Protector in March 2011.